I'm Political Economy editor at Forbes, editor of RealClearMarkets.com, plus a senior economic advisor to Toreador Research & Trading. I have book on how the economy works, Popular Economics: What LeBron James, the Rolling Stones and Downton Abbey Can Teach You About Economics that is set for release in April of 2015. I have a weekly column on Mondays at Forbes.com.

China's "Rare Earths", and the Hypocrisy of the Obama Administration

As is well known now, the Obama administration recently joined the EU and Japan in a lawsuit filed at the World Trade Organization over China’s alleged restrictions on the export of rare earth elements. For those who’ve properly ignored what until now should have been a non-story, “rare earths” are metals essential for the production of everything from smart phones, to hybrid cars, to military equipment.

At present, China produces roughly 95% of rare earths, and it’s of course assumed that the high price of these obscure metals has resulted from export restrictions. Obama et al really ought to look in the mirror on this one, and once they do, leave China alone.

To see why, let’s think for a moment about what this is all about. The U.S. and others are telling China – the country – that it must sell more of what is endemic to China. The hypocrisy here is impressive, particularly considering the myriad restrictions our own government puts on the exploration for and mining of, nearly everything.

What the Obama administration is doing here is the equivalent of China going to the WTO with a lawsuit demanding that we open up more of Alaska and other oil rich locales controlled by the U.S., not to mention reduce the various regulations controlling the mining of other commodities that the U.S. is rich in. If the Chinese were to do so, there’s no telling what the negative reaction would be from the U.S. political class, not to mention its citizenry. We’d be rightfully offended for another country nosing in on what should be a U.S. matter.

It’s arguable that what makes the U.S. great is our collective lack of self-awareness that often reveals itself through some of the most disruptive entrepreneurial innovations known to mankind, but goodness, aren’t we crossing the line when we meddle in the affairs of other countries; essentially saying to them “Mine what we tell you to, and then sell to us”? A little humility is surely in order, for one.

Second, assuming the Chinese were to tell us to for instance bring more “American oil” above ground to reduce the price of crude, their insistence would miss the point. Oil is expensive today because the dollar is cheap, not because the federal government wrongly puts up barriers to exploration on lands controlled by the Feds.

The above in mind, it must be asked why rare earths are presently so expensive. Once we do, we might find U.S. hypocrisy even more obnoxious than it already is on the matter. Indeed, if we ignore for a moment the assertion made by the Wall Street Journal’s Joseph Sternberg about collapsing prices for certain rare earths, it’s arguable that a major factor in some being dear has to do with a dollar that has plunged over the last 11 years in concert with rising commodities prices across the board.

It’s impossible to know for certain given how “rare” these commodities are, but dollar weakness, as opposed to their scarcity, may be a large, but unsung factor at work. Obama et al don’t like expensive commodities, but apparently this most hubristic of Administrations also doesn’t want to do what’s necessary – shore up dollar strength – to bring the cost of rare earths, along with other commodities ranging from oil, to wheat, to meat, down.

Third, and this goes beyond the Administration’s hypocrisy; instead pointing to its economic illiteracy, the lawsuit makes no sense from a basic economics perspective. That’s the case because once a commodity reaches the market, there’s no accounting for its final destination.

The above is important considering what Sternberg also alerted readers to in his recent Journal op-ed. Sternberg observed that Beijing doesn’t have much control over rare-earths producers in China, and to prove his point he noted that roughly 40% of exports to Japan “weren’t registered with Chinese customs authorities.” Translated, rare earths from China are one way or the other exiting the country, and once they do we, along with everyone else, have access to them at whatever the prevailing market price may be.

Just as every oil producing country on earth could “embargo” the U.S. with zero impact on our access to their oil (we’d simply buy it from those they’re not embargoing), so long as rare earths are exiting China, U.S. producers will be able to purchase them in the marketplace in the same way they buy other commodities. Barring a decision by Beijing that forces Chinese producers to hoard rare earths, we’ll be able to buy them.

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